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Major Tax Structures: Income Taxes - Coggle Diagram
Major Tax Structures: Income Taxes
The Argument about Taxing Income
For the System of Taxing Income
Equity - Measuring Ability
Equity - Adjustability
Yield
Base Breadth
Against the System of Taxing Income
Transparency and Compliance
Adminstration and Compliance
Economic Effects
Economic Distortion
Equity
Overuse
Individual Income Taxation
Defining Income: Income equals the value
of consumption plus any increase in net wealth during the year
Adjusted Gross Income: AGI is the tax-law measure of aggregate tax-bearing capacity.
Personal Deductions: ersonal deductions adjust the measured ability to pay the tax to the circumstances
of the individual taxpayer
Personal Exemptions: The tax law allows an exemption for each person in a taxpaying unit—the taxpayer, the taxpayer’s spouse, and dependents (certain members of the household who are supported by the taxpayer, usually the taxpayer’s children)—plus extra exemptions if the taxpayer or spouse is blind or older than age 65
Taxable Income: Taxable income results from subtracting personal deductions, either itemized or standard, and personal exemptions from AGI
Tax Rates: Federal individual income tax rates increase in steps as income increases.
Credits: Tax credits, direct forgiveness of tax owed, are a powerful device for stimulation of
private activities.
Effective Tax Rates: The statutory, or nominal, rates appearing in the rate schedule, of course, are not
the same as the effective rates.
Indexation: When a tax structure has many upward graduated brackets, as the federal structure did until the 1986 tax act, a phenomenon known as bracket creep can occur during 14 Part Two: Revenue Sources, Structure, and Administration high inflation
Tax Computation: The nature of income taxation can best be understood by working the mechanics
of the tax
The Individual Income Tax Gap (The system relies on voluntary compliance by individual taxpayers to produce revenue and, for various reasons, not all taxpayers pay the tax that they owe).
A study find:
First, the withholding system is really effective;
Second, third-party reporting helps induce compliance;
Finally, pure voluntary compliance doesn’t work so well.
Corporate Income Taxation
Dividing The Profit Base: Transfer-pricing rules (the rules establishing what internal prices are allowed) are critical in establishing corporate liability. If the transfer price is high, profit is increased for the subsidiary where the shipment originates; if the transfer price is low, profit is increased for the subsidiary where the shipment ends up. The profit all ends up with the company owning the subsidiaries, but the total profit tax—part paid to the originating country and part paid to the destination country—differs depending on what the transfer prices are.
Integration with the Individual Tax: Partial integration would provide relief only on the share of corporate earnings that are distributed as dividends, either by giving some special credit to dividend recipients to account for the corporate income tax already paid on the flow or by applying the corporate income tax only to undistributed corporate profit. That relief would cut tax collections substantially, and there is the fear that it would appear to be an unwarranted tax break for business.
International Harmonization: One particularly important discussion involves whether corporate income taxes should be harmonized within a trade area, like the European Union, or whether competitive differences should be permitted.
Payroll Taxation
Peculiarities:
First, they are narrow and exclude types of income more likely to be received by higher-income individuals, including interest, dividends, capital gains, and so on.
Second, the federal and state payroll taxes for the social insurance system have
unusual statutory rate patterns.
The payroll tax financing the unemployment compensation system has federal
and state components.
Finally, the federal and state payroll taxes are all earmarked.